Private Capital Call

1Q20 Direct Lending Outlook, with Fran Beyers  (Part II) 

1Q20 Direct Lending Outlook, with Fran Beyers 

Investors today are faced with mixed signals. November’s impressive labor report of 266,000 job gains went a long way to easing fears of an imminent recession.   

But with buoyant markets brought fresh bubble fears: Are prices overinflating? Are valuations headed for a bigger fall down the road? And won’t terms and structures continue to weaken as direct lenders compete to put money to work? Ad infinitum.

CLO managers, in a flight-to-quality strategy, have focused on strong single-B and double-B names. That left vehicles with unused cash....

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As a long-term participant in the credit markets, we’ve learned the most intriguing times are not when things are going swimmingly for issuers or investors. Life is becomes interesting when trends begin to shift, at the inflection points.

These are often apparent only in hindsight. The Great Recession, for example, ended in June, 2009 – barely six months after the rescue of General Motors and Chrysler. Yet it wasn’t officially announced (by the Business Cycle Dating Committee of the National Bureau of Economic Research) until September 2010.

And predictions are tricky. Calls for the next recession have been numerous, and wrong. Signals, like an inverted yield curve, have turned out to be premature.

Tied to economic fortune is the direction of interest rates. Both cause and effect of business prospects, rates were headed sharply up last year. Until the market’s surprise tanking in November led the Fed to hit the brakes and reverse course...

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Recently the Lead Left traveled to Asia to assess how institutional investors view private debt today. One highlight was serving on a panel with other experienced asset managers at the Private Debt Investors Forum in Tokyo...

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“Where to draw the line is also key as we examine Senior Stretch and Unitranche loans. Besides leverage and loan-to-value, yield is helpful in identifying these financings.  

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This week we fearlessly tackle one of the most frequently asked questions in private credit: Namely, where do you draw the line between a Senior Stretch loan and a Unitranche?

It’s a topic that’s gained increasing traction as issuer leverage has risen steadily, going back well before the financial crisis. Back in the early 2000’s when middle market first-lien was 3-ish times debt-to-ebitda, along with mezz or second-lien, you could “stretch” a senior-only financing to 3.5x, maybe 4.0x.

Today Refinitiv LPC data shows all-senior midcap leverage for private sponsored club deals has risen to 4.2x. Similarly, first-lien leverage (with second lien) is up to 4.5x.  

Compare that to unitranche leverage. Back in 2013 single-tranche debt was 4.9x; today it stands at 5.3x. All these levels are the highest since the Great Recession...